Letter of Credit

Letter of credit is a letter issued by a bank to another bank as a guarantee that payments would be made as per scheduled and full.
In other words a letter of credit is issued by bank from the buyer as a guarantee to another bank and to seller that payments would be made on time and correct amount.
On the other hand if a buyer could not pay the guaranteed amount to the bank than bank is authorised to recover the full or remaining amount of the goods purchased. Here we must recognized Letter of credit is dealt in documents not in goods by the bank so it can be called Documentary Credit Letter.

  Benefits of letter of Credit

• The seller has the responsibility of customer's bank's to pay for the shipped items.
• Decreasing the production hazard, if the consumer cancels or modifications his order.
• The opportunity to get financing in the period among the shipment of the products and receipt of charge (mainly, in case of deferred price).
• The vendor is able to calculate the charge date for the goods.
• The buyer will not be capable of refuse to pay because of a criticism about the products.

Drawbacks of Letter of Credit

• The bank pays the seller for the products, on condition that the latter affords to the bank the determined documents in keeping with the phrases of the letter of credit score.
• The purchaser can manipulate the term for shipping of the products.
• By using a letter of credit, the client demonstrates his solvency.
• Within the case of issuing a letter of credit score imparting for delayed fee, the vendor presents a credit score to the consumer.
• Presenting a letter of credit lets in the customer to avoid or reduce pre-bills.